What you need to know
- ASIC can consider the harm caused by financial products in the context in which they are provided. ASIC does not have to identify detriment caused directly from a financial product itself and can consider the broader context or circumstances in which the financial product is sold.
- ASIC has flexibility in how it can identify classes of financial products for the purposes of s 1023D. Short term credit provided with a collateral service contract is a class of financial products for the purposes of the provision.
- Where ASIC is satisfied a financial product, provided in a particular way, is causing significant detriment to retail clients, then it can make a product intervention order that covers a specific manner of providing a financial product.
What you need to do
- When designing a new financial product, consider the potential for consumer detriment from a wholistic perspective rather than just the product's features or disclosure.
- If ASIC informs you that it intends to impose a product intervention order on a financial product you sell, ensure you carefully consider any challenge given the breadth of the considerations ASIC may take into account.
On 29 June 2021, the Full Federal Court handed down a decision clarifying the scope of factors that can be considered by ASIC when determining whether to make a product intervention order (PIO). The decision upheld the Federal Court ruling that ASIC may consider the context and surrounding circumstances of a financial product, such as any collateral agreements to the provision of a financial product, and any detriments resulting purely or partly from those surrounding circumstances.
This decision has significant consequences, particularly for short term credit facilities that have relied on the short term credit exemption under the National Credit Code (NCC). The decision similarly provides some clarity about when and how ASIC may use its PIO power to address what it considers significant detriment.
Background
Short term credit providers typically rely on an exemption in s 6(1) of the NCC which exempts the provision of short term credit from the requirements of the NCC provided that the credit product in question:
- is for a term no longer than 62 days and imposes credit fees;
- has credit fees and charges not exceeding 5% of the credit amount; and
- imposes an interest charge not exceeding 24% per annum.
However, prior to the introduction of ASIC's PIO, some short term credit providers were able to charge additional fees by outsourcing aspects of the credit arrangement. Between 2016 and 2019, Gold-Silver Standard Finance (GSSF) offered short term credit to retail clients in conjunction with their associate, Cigno, who provided collateral services to GSSF's customers including application, management and collection services. As Cigno was an associate of GSSF, and therefore not a short term credit provider, it was not bound by the exemption under s 6(1). As a result, it charged fees that often exceeded the limits contained in s 6(1) of the NCC. ASIC determined that the short term credit arrangement, when taking into account the collateral service, was causing significant detriment to retail clients some of whom were being charged combined fees and charges of up to 990% of the value of the loan. Similarly, retail clients were denied the protections under the NCC, such as the ability to apply for hardship or have a proper responsible lending assessment completed.
Accordingly, ASIC imposed a PIO prohibiting the provision of short term credit unless the total amount of collateral fees and charges charged by a short term credit provider or its associates did not exceed the 5% limit under the short term credit exemption.
Cigno brought proceedings challenging the PIO on a number of grounds, most importantly that the legislation prevented ASIC from considering detriments that did not arise directly from the financial product itself (as distinct from the financial product together with the collateral contract). Cigno also argued that short term credit "provided in a particular way", ie with a collateral service contract, was not capable of being a specific class of financial product for the purposes of s 1023D. Accordingly, ASIC could not make a PIO that only covered short term credit provided with a collateral service contract.
The Federal Court and Full Federal Court rejected Cigno's arguments and ruled that when assessing detriment caused by a financial product, ASIC could consider the broader context or circumstances in which the financial product was provided. The Court also rejected Cigno's argument that short term credit provided with a collateral service contract could not be a financial product for the purposes of s 1023D. Instead, the Court held that there are "no predetermined classes of financial products to which ASIC must turn its attention" and that there were different ways a class could be identified for the purposes of the PIOs.
The decision was handed down shortly after a decision in a separate set of proceedings brought by ASIC against Cigno and another short term credit provider, in which the Court rejected ASIC's argument that the fees charged by Cigno and the credit provider should be considered together for the purposes of the NCC.
What does this mean for short term credit providers?
Following this decision, ASIC now has the certainty that it can make a PIO that orders the credit provider to not engage in particular conduct regarding the collateral services, either entirely or only in accordance with specified conditions. Such orders can undercut this model of short term credit product offering earning significant revenue from collateral services.
ASIC's original PIO against short term credit lapsed on 13 March 2021, and was not renewed by ASIC while the Court considered the Cigno v ASIC proceedings.
What does this mean for financial services licensees?
The Court's decision has provided some clarity around the breadth of factors ASIC may take into account when determining whether to impose a PIO. As identified in the decision, ASIC is entitled to take into account the detriment caused not only by a particular financial product but also the broader circumstances in which it is provided. Similarly, ASIC is now able to define particular classes of financial products in a way that allows it to impose more targeted PIOs.
Accordingly, AFSL holders should be aware that ASIC is likely to consider any detriment caused by any interaction between an AFSL holder and its clients when determining whether there is a need for a PIO.
In addition, the Treasury Laws Amendment (2021 Measures No.4) Bill 2021, which passed on 24 June 2021, has confirmed that ASIC may make PIOs in relation to fees, charges or other consideration payable by a retail client or consumer to a provider (or their associates) of a financial or credit product.
Authors: Lucinda Hill, Partner; Silvana Wood, Partner; and Michael Deighton-Smith, Lawyer.
